Is “Free” the Holy Grail of Product Pricing (For Early Stage Startups)?

A lot of product startups are confused about pricing – as unlike service pricing, product pricing is a lot about the ‘perception’ and less about the effort (in building the product).

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For instance, you do not pay INR 100 for a soap that has gone through multi-level regression testing of different ingredients, tested over 10 years etc. etc.; but you buy products that have a certain perception (driven by advertisements/branding etc.).

But then, perception/advertising is for big boys. In startup space, pricing is also about testing the product hypothesis.

Your options as an early stage startup are Limited

In early stages (and lucky if you have solved the pricing problem in later stages), the founding team is mostly confused about the pricing. And the confusion is not in terms of pricing, but in terms of value proposition – that is,

We know what we are building. But is this even close to what people want? Is this ‘the product’, market has been looking for?

There is no right/wrong answer and frankly, no standard way to find the right answer. A standard observation (mostly from armchair analysts) is to say – “Start charging for it and if people start paying for it, then there surely is some value”.

Logical as it may sound, but the truth of the matter is that this is a lame reason to put a price to your product.

The thing is that you are not validating the product (in the early days), but you are validating the usefulness of what you are building.

And let me repeat that in the early days, product pricing is not about finding the business model, but finding if there is an inherent value in what you have built or not. Also, it is not so much about finding ‘Do people pay for feature X or feature Y’, but it’s simply about finding an answer to : Do people really need this.

Free as a Pricing Model?

We have covered a lot on Freemium pricing model (and why few companies chose to kill the freemium model), but like I said earlier (and I keep encountering this question during meetings with early stage startups) that validating the product hypothesis is the most difficult part and is one of those steps, you cannot ever skip in the product development cycle.

So if you are an early stage startup, do a simple exercise.

Assuming that you want to put a price to your product (in future), simply announce that the product is freely available and start testing user’s reaction. If not for free (for example, if you are selling customized furniture), give hefty discounts and see if people line up to buy the products.

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If they don’t, there is a problem (that is, nobody is interested in the product/offering).

If they do, there has to be a long queue of people willing to use the product. And I certainly mean that there has be a long queue of people willing to use the product. If there is no excitement around the free offering of your product, imagine how hard will it be to sell the premium version?

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Point to note: People flocking to your free product still DOES NOT validate the product/feature combination, but at least now you know that you are on the right track. In short, you are building something which excites people (and in future, can be charged for!).

What’s your opinion? Agree/Disagree?

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